Shifting efficiency

Shall we get back to important economic decisions? The rice price is one such. In most of India the farmer will be making...

Shall we get back to important economic decisions? The rice price is one such. In most of India the farmer will be making decisions to allocate land to crops and if he decides on paddy, what kind, since the seeds will have to be bought and then the technology will largely be determined. Last week, we had argued for a good rice price together with a small increase in urea price as a better solution than a low rice price and a larger urea subsidy translating into large subsidies going abroad in phosphatics and potash, and very poor availability. Some readers asked why the rice price should be raised. It’s a good question. Particularly, since the last crop was good, above 90 million tonnes. So why stop targeting lower rice prices? What is gained by a higher price in an economy reeling under inflation?

Rice production is rising on account of major technological improvements. Some months ago it was reported that eastern Uttar Pradesh and western Bihar had made major shifts to hybrid paddy. This is to genetically engineered varieties, unlike the popular cotton hybrids which are genetically modified. The shift is, however, to so-called illegal varieties and not those marketed by large Indian and foreign companies. The yields are much lower than those of the officially released varieties. The large exception in paddy is to the varieties supplied by the agricultural universities, the HYVs and hybrids. A substantial section of the newer varieties needs to be purchased by the farmer as compared to the earlier HYVs which were self-pollinated and could be replicated by the farmer himself. The new technology is water-demanding in the sense that stress requirements have to be met when they arise and pesticide and fertiliser requirements are high. All of this means that the farmer has to borrow and pay back. Yes, all this is not an argument for a price rise, but only for credit; and the banks are willing to lend as long as the farmer has title to the land. Cooperative finance has been crippled anyway by government policies. This is not an argument for a higher price because yields go up and actually cost per kilogramme of paddy, on that count, would go down even if it goes up per hectare of land or for the average farmer. So what is the fuss all about? Strange as it may sound, in fact, cost per unit also goes up.

We were asked to chair a group on what the Commission for Agricultural Costs and Prices, which recommends procurement prices, should do in a globalising economy. It seemed that this group’s work was at least discussed, although the government classified it. But we now learn that in December 2005 an executive summary was quietly released in the Lok Sabha of the so-called Alagh Committee. The committee’s technical analysis of the available cost studies of farmers in paddy showed that actually, as the farmer shifted from subsistence or low-yielding agriculture to modern technology, not only cost per acre but also per kilogramme of rice went up.

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We called this an “efficiency shifter” and the summary in Parliament gives the tables and charts to prove it. Now that it is available in Parliament, younger economists will pick it up. For starters, we argued that the efficiency shifter arises because, when demand goes up, subsistence agriculture just cannot meet it; since land is limited, the higher-cost option will need to be followed. The other reason was learning costs. Since the technology is new, organising for it is even newer: it all adds to costs. These would be initial start-up costs, which would later go down.

The committee argued that these costs of making an entire sector competitive would have to be met. This would have to be done through policies which work through markets since these are far more effective than sarkari subsidies. We argued, with numerical examples, that an effective interest rate-denominated credit policy (this was called the Venugopal Reddy alternative) could take care of around half of the additional “efficiency shifter” costs as compared to the average costs. The rest could be met by tariffs on imports, or countervailing subsidies — since the EU and US do this in a big way and the whole strategy would be WTO compatible. The CACP went hoarse on integrating tariff policies with procurement policies and the minister made a statement that tariff policy would be used; but then the finance men attacked “inflation”.

The government is going about doing it in the worst possible way. In an open economy, to have a purchase policy without a tariff component is like pouring water into a leaking bucket if the other man decides to subsidise. To ban exports when world prices are high and to allow free imports when they are low is both incorrect and immoral. To give large subsidies for an employment guarantee scheme while dithering on price policies is grossly inefficient: employment will be created at much lower cost through the market. To fight inflation not through macro policies but by targeting low agricultural prices simply doesn’t make economic or political sense.

The writer, a former Union minister, is chairman, Institute of Rural Management, Anandyalagh@gmail.com

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